Payroll In Practice: 12.9.2024

Question: Step 4(c) of Form W-4 allows an employee to elect additional withholding each pay period. Can an employee enter a negative number to reduce withholding?

Answer: There is a way for employees to reduce their tax withholding using the Form W-4, Employee’s Withholding Certificate, but the method described will not work. The federal Form W-4 does not authorize entry of a negative number in Step 4(c). Entering information other than what is intended to appear on a specific line will invalidate the form.

The 2024 Form W-4 instructions indicate that an entry on Step 4(c) will increase the amount of tax withheld each pay period. There is no mention of a reduction in withholding:

“Step 4(c). Enter in this step any additional tax you want withheld from your pay each pay period, including any amounts from the Multiple Jobs Worksheet, line 4. Entering an amount here will reduce your paycheck and will either increase your refund or reduce any amount of tax that you owe.”

In contrast, Step 3 of the form allows employees to claim tax credits in addition to the two listed for qualifying children and other dependents. Withheld tax constitutes a tax credit, and an entry in Step 3 should decrease in the amount of tax withheld, according to its instructions:

“You can also include other tax credits for which you are eligible in this step, such as the foreign tax credit and the education tax credits. To do so, add an estimate of the amount for the year to your credits for dependents and enter the total amount in Step 3. Including these credits will increase your paycheck and reduce the amount of any refund you may receive when you file your tax return.”

The IRS withholding calculator supports using Step 3 to reduce withholding if expected year-to-date withholding exceeds the expected tax liability. For example, a test case entered into the calculator following the Nov. 30 semimonthly pay period resulted in expected withholding of $3,775 for 2024 and an anticipated tax obligation of only $3,579. The calculator suggested submitting a new 2024 Form W-4 with $3,760 entered in Step 3 to reduce the withholding for the remaining two pay periods of 2024 to zero.

The challenge of using this method is that it reduces withholding the same amount for each of the remaining pay periods during the year. This includes individual pay periods that might have supplemental pay such as bonuses. Consequently, the aggregate or optional flat rate methods for withholding from supplemental pay might result in withholding at a higher rate than the employee’s actual average tax rate. This method does not provide direct relief to the period when the bonus is paid unless the employee submits a Form W-4 for the bonus period and submits a new Form W-4 effective after the bonus period.

At the state level, the rules vary. Some states, such as Connecticut and Louisiana, allow employees to reduce their tax withholding. The Connecticut Form CT-W4, Employee’s Withholding Certificate, has separate lines where the taxpayer may indicate additional or reduced withholding per pay period. The Louisiana Form L-4, Employee’s Withholding Allowance Certificate, allows the employee to either increase or decrease the amount to withhold on Line 8, with a decrease indicated as a negative amount.

Other states, such as Michigan and Idaho, allow for additional withholding per pay period but do not allow for a decreased amount. Both Michigan and Idaho limit the number of withholding allowances that may be claimed to the personal or dependent exemptions claimed on the employee’s individual income tax return.

Other states may allow other exemptions to be used to decrease withholding. For example, the Illinois Form IL-W-4, Employee’s and other Payee’s Withholding Allowance Certificate and Instructions, allows for basic personal and dependent allowances, certain specific additional allowances, and additional allowances for any amount reported on Line 4 of the Deductions Worksheet for federal Form W-4, plus any additional Illinois subtractions or deductions.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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